Q&A with SD investor who backed Sprouts IPO

San Diego-based private equity firm Silver Canyon Group invested in Sunflower Farmers Market before it merged with Sprouts Farmers Market, which last week had one of Wall Street's most successful public trading debuts in years.
— Nelvin C. Cepeda

San Diego-based private equity firm Silver Canyon Group invested in Sunflower Farmers Market before it merged with Sprouts Farmers Market, which last week had one of Wall Street's most successful public trading debuts in years.
— Nelvin C. Cepeda

In 2007, Silver Canyon Group invested $30 million in Phoenix-based Sunflower Farmers Market. Under Silver Canyon’s guidance, the company expanded from 13 stores in three states to 38 stores in eight states, while revenue grew from $133 million to $450 million and earnings quadrupled. By 2012, its growth compelled Sprouts, another Phoenix company — whose chain traces its roots to a San Diego fruit stand in 1943 – to merge with Sunflower. Sprouts, founded in 2002, had $2 billion in sales last year and now operates 163 store across eight southwestern states, 22 of them in San Diego.

Meanwhile, Silver Canyon’s $30 million initial investment in Sunflower preferred stock is now worth more than $250 million post-IPO, and the group has a 6.2 percent ownership in Sprouts.

U-T San Diego We talked with Tim Kelleher of Silver Canyon Group to learn what he and his partner, Doug Meltzer, saw in Sunflower Farmers Market and to learn where they might invest next. (Questions have been paraphrased and shortened for brevity.)

Q: What did you see in Sunflower that you look for in other companies?

A: We saw in Sunflower a business that was catering to a growing market. In this case, it was greater awareness and attention that Americans are giving to healthy, natural and organic living. The second thing we look for is an experienced management team and a proven business model. Sunflower was founded by a team that previously founded (grocery chain) Wild Oats and built it into a big company. They were very successful with Wild Oats and able to apply what they learned, and avoid some of the mistakes they made. The third thing we look for is differentiation: A business model that offers something new or better than what's on the current market. They offer a powerful consumer proposition of natural and organic products at conventional grocery store prices.

Q: What is the tipping point for determining when a company like Sunflower needs the expansion capital that you can provide?

A: Companies have many tipping points when they need growth capital, and for some it goes on for years. We invested at a point when they needed it in order to accelerate their growth and capitalize on a market opportunity that existed. It's not that without it they would fail, but sometimes companies need to capitalize on an opportunity that would exist for a finite time period.

We provided capital to Sunflower that enabled them to accelerate their store opening plans, and take advantage of the opportunity to open stores in attractive locations at the attractive lease rates that existed and still exist, to some degree. When we invested, Sunflower had 13 stores, and we provided capital that allowed them to open 25 new stores in existing and contiguous markets. We were looking at concentric circles expanding out from the existing market base.